Risks to the global financial system are rising, as emerging markets face a squeeze from the strong U.S. dollar and weak commodity prices, the IMF said.
While the strengthening greenback and lower oil prices are boosting the world recovery, the changing landscape is putting pressure on countries and firms that export crude and other commodities, the International Monetary Fund said in its semiannual Global Financial Stability Report released Wednesday.
“Further rapid dollar appreciation and an abrupt rise in U.S. interest rates, coupled with a rise in geopolitical risks, could put added pressure on emerging-market currencies and asset markets,” the IMF said. “Foreign investors could abruptly reduce their holdings of local-currency debt, thereby adding to turbulence and creating debt rollover challenges.”
The Washington-based lender said the strains are already becoming evident in the ability of oil and gas companies in Argentina, Brazil, Nigeria and South Africa to repay debt.
The IMF’s warning comes two years after emerging markets were roiled by speculation the Federal Reserve would wind down its unprecedented stimulus program, an episode known as the “taper tantrum.” Fed policy makers have signaled the central bank may start raising rates as early as June, a move that would increase the burden on foreign companies that borrowed in U.S. dollars.
A “sudden rise” of 1 percentage point in the 10-year Treasury yield is “quite conceivable” if a Fed interest-rate increase comes sooner than investors anticipate, the IMF said. “Shifts of this magnitude can generate negative shocks globally, especially in emerging-market economies.”
Volatility in major foreign-exchange rates has increased by more than any similar time since the global financial crisis, the IMF said. Reduced liquidity in the currency and fixed-income markets could make it difficult for investors to adjust their portfolios, it said.
“The resulting tensions in global financial markets have increased market and liquidity risks, given that sudden episodes of volatility could become more common and more pronounced,” the IMF said.
The IMF said declines in “structural liquidity” in world bond markets have “amplified asset-price responses to shocks, increasing potential spillovers” to other assets and to emerging markets.
The dollar has appreciated 6.5 percent this year after an 11 percent jump in 2014, according to the Bloomberg Dollar Spot Index. The price of oil has fallen about 49 percent since June.
The report also highlights the threat of a “retrenchment” in Chinese industries that are facing overcapacity, as well as in the country’s property market. Financial stress among Chinese real-estate firms could cause “cross-border spillovers,” the fund said.
The hunt for yield in a world of depressed interest rates is “stretching some asset valuations,” the fund said, adding that the low-rate environment could pose solvency issues for European life insurers.
Stress tests on the European life-insurance industry, which has 4.4 trillion euros ($4.7 trillion) in European Union credit assets, show that 24 percent of firms may not be able to meet their solvency requirements under a prolonged low-rate scenario, according to the IMF.
The fund said markets “appear complacent” about geopolitical risks such as the conflict in Ukraine and the negotiations among Greece and its international creditors.
The IMF urged the euro area and Japan to take steps to maximize the asset-purchase programs of their central banks. European banks need to clear non-performing loan to unclog credit, while it’s “essential” that the government of Japanese Prime Minister Shinzo Abe follow through on promised fiscal measures and structural reforms, the fund said.
“Additional policy measures -- beyond monetary policies -- are vital to make a durable exit from the global financial crisis and to safeguard financial stability,” Jose Vinals, director of the IMF’s monetary and capital markets department, said at a press briefing on the report.